After reviewing the new activity-based costing system that Nancy Chen has implemented at IVC's CenterPoint manufacturing facility, Tom Spencer, the production supervisor, believes that he can reduce production costs by reducing the time spent on machine setups. He has spent the last month working with employees in the plant to change over the machines more quickly with the same reliability. He plans to produce 100,000 units of the Sport model and 40,000 units of the Pro model in the first quarter. He believes that with his more efficient setup routine, he can reduce the number of setup hours for both the Sport and the Pro products by 25 percent. Cost Drivers and Cost Driver Volumes-CenterPoint Manufacturing Facility Cost Driver Volume Activity Cost Driver Sport Pro Total Assembly building Assembling Machine-hours 6,000 30,000 36,000 Setting up machines Setup hours 400 440 Handling material Production runs 40 48 Packaging building Inspecting and packing Direct labor-hours 60,000 22,800 82,800 Shipping Number of shipments 200 300 40 8 100 Third Quarter Unit Cost Report, Activity-Based Costing-CenterPoint Manufacturing Facility Sport Pro Direct material $1,500,000 $2,400,000 Direct labor Assembly $ 750,000 $ 600,000 Packaging 990,000 360,000 Total direct labor $1,740,000 $ 960,000 Direct costs $3,240,000 $3,360,000 Overhead Assembly building Assembling (@ $30 per MH) $ 180,000 $ 900,000 Setting up machine (@ $900 per setup hour) 36,000 360,000 Handling material (@ $3,000 per run) 24,000 120,000 Packaging building Inspecting and packing (@ $5 per direct labor-hour) 300,000 114,000 Shipping (@ $1,320 per shipment) 132,000 264,000 Total ABC overhead $ 672,000 $1,758,000 Total ABC cost $3,912,000 $5,118,000 Number of units 100,000 40,000 Unit cost $ 39.12 $ 127.95 Required: a. Compute the amount of overhead allocated to the Sport and the Pro drones for the first quarter using activity-based costing. Assume that all events are the same in the first quarter as in the third quarter except for the number of setup hours. Assume the cost of a setup hour remains at $900. Model Total ABC Overhead Sport Pro
